Question about retro payments and rollovers

[Guest RobBobBobby]

Hello,

I'm having a hard time verifying my thinking on this subject. I found a good link one time but I'm having a problem finding it again. Maybe someone can point me in the right direction.

It is my belief the make up payments for a retroactive annuity start date are not rollover eligible. The plan I'm working on does not pay lump sums and gives an interest adjustement for the make up payments per RASD rules. I don't believe the make up payments should be allow to be rolled over.

The trustee/administrator is pointing to 1.402© as justification for the amount being roll over eligible but when I read it I just see it as it falls under the special exemption from not violating the equal payment rule.

Basically employees are going missing/not electing at NRA and then being able to elect rollovers which I just don't see as being permissable.

Any help is appreciated.

[Andy the Actuary]

IMHO, if other than lump sum is elected, the accumulated retroactive payments will not be available to rollover and the payments will be subject to federal income tax withholding that applies to periodic rather than to lump sum payments. I.e., the 20% rule for lump sums does not apply. See § 1.402©-2 Q/A 6(b).

[Guest RobBobBobby]

IMHO, if other than lump sum is elected, the accumulated retroactive payments will not be available to rollover and the payments will be subject to federal income tax withholding that applies to periodic rather than to lump sum payments. I.e., the 20% rule for lump sums does not apply. See § 1.402©-2 Q/A 6(b).

I agree with this interpretation but the administrator is using the same reference stating that 6+ months of retros is not "reasonable" and therefore rollover eligible.

[david rigby]

Find IRS Publication 590 here: http://apps.irs.gov/app/picklist/list/formsPublications.html

Then start reading on page 23.

[Andy the Actuary]

Presuming you are a "consultant," it is their call. If you believe it is the wrong call (and you are their legal counsel), you've stated your opinion and they've chosen to ignore. So be it.

If I believed they were incorrect, I would not be a party to their actions without qualification.

You already know all this but it may be helpful to hear others in your camp.

The rollover issue is interesting in that the Plan Administrator is put in the position of giving tax advice though he may claim he is not. Sort of like the EA signing his/her name that actuarial assumptions are reasonable in the aggregate which is okay so long as you're not called to the head of the class to define "reasonable in the aggregate" and support why the assumptions used support that definition.

[Guest RobBobBobby]

Find IRS Publication 590 here: http://apps.irs.gov/app/picklist/list/formsPublications.html

Then start reading on page 23.

I appreciate the reference to 590 but it still does not address the subject on whether the make-up payments themselves are rollover eligible. Yes substantially equal payments are not rollover eligible but an initial retro payment falls under 1.402©-2 Q/A 6(b) and it appears this is up to interpretation. And there is one large administrator that is taking the stance that the retro payments would not meet the expemption if they are for 6+ months

I'm seeing this as an interpretation issue (one that I don't agree with the administrator) that I would just need to table unless I see something concrete to point to be concerned with.

[Guest RobBobBobby]

Andy I really liked the way you stated the last post.

[david rigby]

I think 1.402©-2 Q&A6(b) supports the position that such retroactive payment is not eligible for rollover.

"...will be treated as a substantially equal payment in the series...".

This leads back to Q&A3(b)(1) which states NO.

[masteff]

Also see 1.417(e)-1: "Also, for purposes of section 72(t)(2)(A)(iv), a distribution that would otherwise be one of a series of substantially equal periodic payments will be treated as one of a series of substantially equal periodic payments notwithstanding the distribution of a make-up payment provided for in paragraph (b)(3)(iv)(B) of this section."

Which is about as an emphatic of a "not rollover eligible" as the Treasury department can get.

[Guest RobBobBobby]

Also see 1.417(e)-1: "Also, for purposes of section 72(t)(2)(A)(iv), a distribution that would otherwise be one of a series of substantially equal periodic payments will be treated as one of a series of substantially equal periodic payments notwithstanding the distribution of a make-up payment provided for in paragraph (b)(3)(iv)(B) of this section."

Which is about as an emphatic of a "not rollover eligible" as the Treasury department can get.

Thanks this and David last post are great! I appreciate the help